Living Economics

Medicare and Social Security are Ponzi schemes whose long-term financial viability depends on an ever larger body of later contributors paying off a much smaller body of earlier contributors.

In 2040, the US national debt is projected to be more than 200% of GDP and almost the whole federal budget has to be spent on Social Security, Medicaid, Medicare, and debt servicing. Based on GAO data, to balance the federal budget, federal spending must be cut by 60% or overall federal tax burdens raised to twice 2008’s levels. In other words, the US government will likely go into receivership and all US Treasury bonds will be downgraded to junk bond status. China and all oil-exporting countries may stop buying US Treasury bonds to finance US deficits.

This scenario is all but inevitable unless drastic and politically unpopular actions are taken immediately. Social Security, Medicaid, and Medicare already accounted for 40% of the total federal budget in 2008. Medicare benefits already exceeded Medicare tax revenue in 2005. And Social Security will have negative cash flow in 2017.

Nominally, the Medicare Trust Fund does not run out of money until 2020 and the Social Security Trust Fund until 2041. But any surplus exists only in Treasury bonds the nominal value of which has already been spent to fund general federal budgets. In effect, the surpluses in these trust funds have been covering up the true federal budget deficits all along. To tap these surpluses, the federal government has to borrow again from domestic and foreign creditors.

These social insurance schemes pay handsomely to earlier contributors as long as an ever larger number of contributors comes after them, but fall apart when the number of contributors begins to shrink. These schemes are euphemistically called “pay as you go”. In effect, they are nothing but Ponzi schemes. Sure enough, there were 16.5 contributors per benefit recipient in 1950. But by 2000 the ratio has decreased to 3.4 contributors to 1 recipient.

As if existing Ponzi schemes are not onerous enough, the US Congress has been busily cooking up additional Ponzi schemes. In 2003, it added generous Medicare drug benefits. And now it is dead set on universalizing health coverage without seriously addressing the cost containment issue.